Flat management companies: how they work and who's responsible

Property management companies (known as 'flat management companies'), can be formed by residents who want to purchase the property’s freehold, however, they’re typically set up by developers. When accumulating properties, a developer may need to give some thought to how they will manage these properties and their tenants or owners.

Before getting started, there are a number of questions to consider. For example, how does this work? What are the requirements? And inevitably, what does this mean for the developer who chooses this option? Will he control the company? If not, who will be the company director?

Setting up a private limited company comes with responsibilities for those involved in the management, and it’s important to understand what they are.

How to set up a PMC

To set up a PMC, you need to satisfy some key requirements.

There must be a building with divided units (flats), a chosen company name (sometimes the address of the building will be used as the name of the company), along with the registration of the company.

To register a company and make it viable, you only need one director. However, we do recommend that a property management company should have at least 2 directors, as it’s a lot of responsibility for one person.

A director can have different titles such as executive director, or non-executive director. And it’s important to note: some directors are shareholders, but not all shareholders are directors.

Who is a director?

When setting up a PMC, it’s typical to have the developer of the building as a director. But, this is not always the case.

It may be that a new tenant of a building, or indeed either a freehold or leasehold owner, becomes a director of a PMC. The appointment process can happen in one of two ways:

by a director’s appointment

or through resolution (this is a vote between all eligible members of the PMC)

One may be appointed as a director, so long as they’re a member of the company.

What are the responsibilities of a director?

There are 2 main areas of responsibility for a director. These are:

responsibilities to the members of the company

responsibilities to the property

Responsibility to members of the company

Being the director of a PMC has 2 sides; the informal, ‘day-to-day’ activities of a PMC director, and the formal, legislative aspect.

Typically, a PMC will consist of neighbours living in an apartment block (with each flat known as a ‘unit’ in the articles of association) with the aim of ensuring the smooth management of the building.

A director must make sure that actions are taken when needed. For instance, if there was an unfortunate flood in a communal bin area, a director would be the first point of contact to deal with it. The problem would be solved through the measures put in place by the PMC for situations like this.

Having a position of power in a company can feel overwhelming. And this is where legislation on director responsibilities comes into play. These are called the ‘general duties’ of company directors, under the Companies Act 2006.

In a nutshell, the 7 main duties are:

To act within powers

This means acting within the company’s constitution, and only exercising powers for the purposes for which they are conferred to (as such making decisions which solely revolve around the building and its management).

To promote the success of the company

A director needs to consider the long-term impact of their decisions on the company. In this case, the impact on the building and its running, the owners of the other units, the harmony between all neighbours, or to maintain the positive reputation of the building.

To exercise independent judgement

A director has the duty to make decisions free of influence from other members of the company. This does not mean that they cannot consult each other – it is more so that one director cannot exercise undue influence over any other.

To exercise reasonable care, skill and diligence

This sets out that a director must display the knowledge, skill and experience set out in the objective test. If you already have experience of being a director of a PMC, your expected ‘standard of care’ would be greater. It would be expected that you would know when a mistake has been made, or you would reasonably know how to act in the event of a problem.

The director also needs to stay informed about the company’s affairs, and join with co-directors in supervising and controlling these affairs (regardless of the knowledge of PMCs and the role as a director).

To avoid conflicts of interest

A director must avoid situations in which they have, or can have, a direct or indirect interest that conflicts with, or may conflict with, the company’s interests. This duty continues to apply to persons who cease to be a director in the case that this person knew of possible conflicts of interest (and didn’t act upon it) before resigning from the position.

Not to accept benefits from third parties

This means that a director cannot accept bribes offered for any reason (these may arise as a result of their director status), or which involve a director in doing (or not) any actions within his/her role.

To declare an interest in a proposed transaction or arrangement

A director cannot do this unless they have the approval from the members of the company, or is appropriately authorised under the articles of association – the director involved must disclose their interest to the other directors of the company.

These duties are owed to the company (and its members) by the director, and can only be enforced by the company. The company's members can take various forms, such as owners of the properties, or even the developer.

Creditors are also extremely important to keep in mind when considering director duties. It’s mentioned in s.172(3) of the act – any decision made by a director must consider the thoughts of any creditors the company may have.

Responsibilities to the property

Although the main point of focus will be responsibilities to the members of the company, it’s also essential to remember the purpose of the PMC – the property.

In this sense, a director will have similar responsibilities to a landlord. This broadly involves the management of the property (selling, buying, insuring, fund collecting), the collecting of rent and charges, taxes, and to maintain and repair the premises when required.

If you have questions or would like additional info about property management company formations, please feel free to get in touch with Adam Wadsley, Jordans Corporate Law.

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2 comments

Comment byMichelle Smithposted onon 26 September 2018

Hi, can you confirm why you suggest there MUST be 2 directors? A company needs only one under the Companies Act 2006 so this statement seems misleading. Did you intend to say that it is advisable given the nature of the company?

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